VIRIDIAN INSIGHTS

• Tilray (TLRY: Nasdaq) surprised us by announcing it was acquiring 100% of the shares of HEXO (HEXO: Nasdaq). The transaction combines the conversion of its senior secured convertible debentures for approximately 49% of the company and tendering for the remaining shares. We can’t imagine HEXO’s shareholders will turn down what may be the last kick save of the game. What we don’t understand is why Tilray would do it. Tilray’s shareholders would be better served by following a similar strategy to the one employed by Gotham Green with its position in MedMen. There is no good reason to give up a secured debt position by early conversion. Gotham was more strategic, feeding MedMen the minimum amount of liquidity to keep it going while maintaining its secured debt position (and hoping for some legislative miracle). Why give up the optionality? Tilray gains no benefit from consolidating HEXO’s results except for an ephemeral boost in sales.

• The yield curve continues to be more inverted than it’s been for 20 years, yet we still believe that the Fed will continue raising rates. We are unsure what it will take for the Fed pivot theme to get beaten out of the market.

• We took a fair amount of solace from our review of 2023 EBITDA estimates, post-4^th quarter releases. Forecasts for 2023 are significantly lower than estimates for 2022 were at this time last year, and they are only about 9% higher than actual 2022 results. We want to believe that moderating expectations may leave room for some upside surprises.

• However, we need to see the end of downward revisions to form a solid bottom. The chart below shows the revisions to the consensus 2023 EBITDA estimates for March 2023.  Eight of the 19 companies on the chart had downward revisions of more than 10%, and only one had an upward revision. Those of you who saw our Viridian Chart of the Week are familiar with the Airport Flight Delay Theorem, which says that downward revisions are most often followed by more downward revisions…